Appoloni v. United States (450 F.3d 185, 2006)

KENNEDY, J., delivered the opinion of the court, in which COOK, J., joined. GRIFFIN, J. (pp. 196 - 205), delivered a separate opinion concurring in part and dissenting in part.

OPINION

KENNEDY, Circuit Judge.

In these cases consolidated on appeal, we address whether payments made to public school teachers, who relinquished their statutory tenure rights and resigned from their positions upon accepting the payments, constitute “wages” taxable under the Federal Insurance Contribution Act (“FICA”). Appoloni v. United States was filed in the United States District Court for the Western District of Michigan; Klender v. United States was filed in the United States District Court for the Eastern District of Michigan. In each case, both parties filed cross-motions for summary judgment. In Appoloni, the district court granted summary judgment for the government; in Mender, the court granted summary judgment for the Plaintiffs. For the following reasons, we hold that the payments made in exchange for the relinquishment of statutorily granted tenure rights constitute “wages” taxable under FICA. Thus, we REVERSE the district court’s judgment in Mender, and we AFFIRM the court’s judgment in Ap-poloni.

BACKGROUND

On March 27, 2002, three taxpayers filed suit in the Eastern District of Michigan. On November 21, 2002, three taxpayers brought suit in the Western District of Michigan. Both lawsuits were certified as class actions and differ only in minor respects not relevant here. In general, the class encompasses all former employees of Michigan school districts and public post-secondary education institutions, residing in the Eastern (Mender) and Western (Appoloni) Districts of Michigan who received early retirement incentive payments from their respective school districts and who unsuccessfully applied to the Internal Revenue Service (“IRS”) for refunds of FICA taxes withheld from those payments.

I. Appoloni

Plaintiffs, Donald Appoloni, William Bergemann, and Sandra Engle, were tenured public school teachers employed by the Dowagiac Union Public School District (the “School District”). All three had been granted tenure by the School District pursuant to the Michigan Teachers’ Act (“Tenure Act”) Mich. Comp. Laws § 38.71. In Michigan, a teacher automatically earns tenure by successfully completing a probationary period. See Mich. Comp. Laws § 38.71. As tenured teachers, Plaintiffs were entitled to continued employment with their respective school districts absent “reasonable and just cause” and subject to the procedural protections set forth in the Tenure Act.

During the 2000-2001 school year, the School District offered an early “employee severance plan” (“ESP”) to its most senior teachers. Teachers who had at least ten years of service with the School District and were at a high step in the pay scale, were eligible to participate in the plan. Participation in the plan was voluntary, and the plan provided that if more than 30 eligible teachers applied, eligibility to participate would be determined on the basis of seniority. The purpose of this plan was to “help prevent teacher layoffs and to lessen the Board’s economic responsibility in the area of staffing.” J.A. at 77.

Participants in the ESP were required to resign as of June 30, 2001, and to agree to a waiver providing that the teacher “waived all claims arising out of employment with the District, including claims ... under the Tenure Act.” Additionally, participating teachers agreed to “waive ... all entitlement to future wage and benefit increases, all rights to participate in any district sponsored benefit plans” and agreed to not “apply for reemployment” without the School District’s consent. J.A. at 81. Participating teachers received the equivalent of their 1999-2000 annual base salary (but not more than $53,021) in 60 monthly payments over a five-year period. J.A. at 25.

The School District withheld FICA taxes from the installment payments. Relying on the Eighth Circuit’s decision in North Dakota State Univ. v. United States, 255 F.3d 599 (8th Cir.2001), the taxpayers filed claims for refunds of the FICA taxes withheld, and when the IRS denied those claims, the taxpayers filed suit in the Western District of Michigan.

Both the Plaintiffs and the government filed motions for summary judgment. The district court granted the government’s motion and denied the Plaintiffs’ motion. Plaintiffs filed this timely appeal.

II. Klender

The Klender litigation similarly involves tenured teachers who were offered an “Employee Severance Plan” designed to induce tenured teachers to retire. In Klender, all three Plaintiffs — Phyllis F. Klender, Roger J. Petri, William B. Rase — were employed as Michigan public school teachers and also had been granted tenure pursuant to the Tenure Act.

Plaintiff Klender accepted a buyout that the Pinconning Area School District offered her during the 1999-2000 school year. The buyout was offered to teachers with 20 or more years of service with the district. Any eligible teacher who agreed to retire as of June 30, 2000, would receive a payment of $46,800 made in 72 monthly installments over six years. In exchange, teachers were required to “waive ... all future employment rights,” to agree not to apply for re-employment in the district without the district’s consent, and to “waive and release the District forever from rights to re-employment and from any claims based, inter alia, on her ‘tenure rights.’ ” J.A. at 47.

Plaintiff Petri accepted a “Voluntary Teacher Severance Incentive Program” offered by the Pinconning Area School District to teachers with ten or more years of service. If an eligible teacher agreed to “voluntarily resign his or her employment with Pinconning Area Schools [and] forfeit all seniority rights,” the teacher would receive a minimum guaranteed payment of $2,000. That payment increased to a total of $37,500 if ten or more eligible teachers opted to participate in the program. Plaintiff Petri accepted the buyout offer on February 17,1997.

Plaintiff Rase also accepted a buyout that was offered pursuant to an “early retirement” provision in a collective bargaining agreement between the West Branch-Rose City Area School District and the West Branch-Rose City Education Association. Teachers with a minimum of 20 years’ service in the District and 25-29 years’ credit under the Michigan Public School Employees’ Retirement Plan qualified for an early retirement incentive. Incentive payments began at $30,00 for teachers with 25 years and decreased by $5,000 for each additional year of retirement credits up to 29. On January 24, 2001, Plaintiff Ease announced his retirement.

In making these buyout payments to Plaintiffs Klender, Petri, and Rase, the school districts withheld FICA taxes from the amount paid. Between August and October of 2001, all three Plaintiffs filed claims for refunds with the IRS. The IRS denied the claims. Plaintiffs then filed this action in the Eastern District of Michigan. Both parties filed cross motions for summary judgment. The district court denied the government’s motion and granted the Plaintiffs’. This appeal followed.

STANDARD OF REVIEW

We review a district court’s grant of a motion for summary judgment de novo. Wojcik v. City of Romulus, 257 F.3d 600, 608 (6th Cir.2001). Summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact.” Fed.R.Civ.P. 56(c). “There is no such issue unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party.... [T]he inquiry is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 243, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). “The fact that the parties have filed cross-motions for summary judgment does not mean, of course, that summary judgment for one side or the other is necessarily appropriate.” Parks v. LaFace Records, 329 F.3d 437, 444 (6th Cir.2003). b: useful labor that does not produce a tangible commodity - usually used in plural < charge for professional services >[,] Merriam-Webster Online Dictionary, http://www.m-w.com (enter term “service”)”; “The performance of work or duties for a superior or as a servant .... 4. a. Work done for others as an occupation or business,” DiCtionary.Com, http://dictionary. reference.com/ (enter term “service”)”.

After my review of these common definitions and Social Security Board v. Nierotko, 327 U.S. 358, 66 S.Ct. 637, 90 L.Ed. 718 (1946), which held that the term “service” is not limited to “productive activity,” but includes compensation for the loss of actual wages, I conclude, consistent with the Eighth Circuit, the United States District Court for the Western District of Pennsylvania, and the United States District Court for the Eastern District of Michigan, that the ESP payments were made in exchange for the relinquishment of plaintiffs’ statutory and constitutionally-protected tenure rights, rather than remuneration for “services” to the school districts. Similar to the payment of meals and lodging in Rowan Companies, Inc. v. United States, 452 U.S. 247, 101 S.Ct. 2288, 68 L.Ed.2d 814 (1981), and the release of tort claim damages in Gerbec v. United States, 164 F.3d 1015, 1026 (6th Cir.1999), the ESP payments, although arising in the employment setting, were not remuneration for “any service” performed by plaintiffs. Rather, the ESP payments were a “clear, separate, and adequate consideration” exchanged for the relinquishment of plaintiffs’ vested and bona fide statutory rights to tenure.

III.

Prior to Rowan, a plausible argument could be made that the term “wages” as used in the FICA should be “broadly construed.” See Nierotko, 327 U.S. at 355-366, 66 S.Ct. 637. Relying on Nierotko and obiter dictum from our decision in Gerbec, 164 F.3d. at 1015 (“ ‘remuneration for employment’ as it appears in [26 U.S.C.] § 3121 should be interpreted broadly”), the majority reaches a result which is largely ordained by its choice of a rule of statutory construction.

In my view, the statute at issue, like all statutes, should not be construed “broadly,” “narrowly,” “strictly,” or “liberally,” but rather fairly and reasonably. In this regard, I agree with Justice Scalia that “[a] text should not be construed strictly, and it should not be construed leniently; it should be construed reasonably, to contain all that it fairly means.” Soalia, A Matter Of Interpretation at 23.

Furthermore, any notion that § 3121 should be interpreted broadly, rather than fairly and reasonably, was rejected by the Supreme Court in Rowan, 452 U.S. at 263, 101 S.Ct. 2288. In Rowan, the government unsuccessfully argued that the holding of Central Illinois should not apply to the term “wages” as contained in the FICA. Id. at 251-52, 101 S.Ct. 2288. The government contended that the definition of “wages” for purposes of the FICA should be given a broader and more expansive interpretation. Id. The government’s position was rejected by the Supreme Court, and the treasury regulation at issue was declared invalid. Id. at 263, 101 S.Ct. 2288. The Court summarized its holding as follows:

We conclude that Treas. Reg. §§ 31.3121(a)-l(f) and 31.3306(b)-l(f) fail to implement the statutory definition of “wages” in a consistent or reasonable manner. The plain language and-legislative histories of the relevant Acts indicate that Congress intended its definition to be interpreted in the same manner for FICA and FUTA as for income-tax withholding. The Treasury Regulations on which the Government relies fail to do so, and their inconsistent and unexplained application undermine the contention that Congress nonetheless endorsed them. As Congress did intend a consistent interpretation of its definition, these Treasury Regulations also are inconsistent with the Court’s reasoning in Central Illinois.

We therefore hold that the Regulations are invalid, and that the Service erred in relying upon them to include in the computation of “wages” the value of the meals and lodging that petitioner provided for its own convenience to its employees on offshore oil rigs. The judgment of the Court of Appeals is reversed.

Id.

Although Congress amended 26 U.S.C. § 3121(a) in response to Roivan, thus allowing differing regulatory treatment of “wages” for purposes of income tax withholding and the FICA, the “broad interpretation” of the definition of “wages” for FICA purposes has not been restored.

After construing the statute at issue in a fair and reasonable manner, consistent with the words used by Congress, I would hold that, with the exception of plaintiff William Rase, the ESP payments were made in exchange for the relinquishment of plaintiffs’ statutory and constitutionally protected tenure rights, rather than as remuneration for services to the school districts.

IV.

The weight of authority from the circuits also supports plaintiffs’ position. In Ger-bec, the plaintiffs successfully sued their employer for damages arising from ERISA violations, and a question arose whether the resulting payments were subject to FICA and income taxes. 164 F.3d at 1026. We held that “any damages attributable to wages [plaintiffs] would have received had they not been wrongly terminated should also be subject to the FICA taxes they would have paid on those wages had they not been wrongly terminated.” Id. at 1026-27. Significantly, we also held that the plaintiffs’ tort damages were not subject to FICA taxation. Id. In short, only the portion of the damages that compensated plaintiffs for the loss of actual wages was taxable pursuant to FICA. Id.

The majority acknowledges this distinction, holding that awards representing a loss in wages that otherwise would have been paid are subject to FICA taxes. Yet there is no question that the severance payments would not have been paid had plaintiffs not relinquished their tenure rights. Were it not for their statutory tenure rights, plaintiffs would be at-will employees, subject to discharge without cause or consideration. See generally Toussaint v. Blue Cross-Blue Shield, 408 Mich. 579, 292 N.W.2d 880 (Mich.1980). Indeed, this is evidenced by similarly situated employees who worked the same number of years and were entitled to the same salary levels as plaintiffs, who did not receive the ESP payments. The ESP payments therefore were not made in exchange for any “service” that plaintiffs performed or were wrongfully prevented from performing, but, rather, in exchange for the relinquishment of a separate statutory right. Accordingly, the majority’s conclusion that any damages arising from a lawsuit following the illegal deprivation of the tenure right would be taxable under Gerbec is not correct.

The uniformity in the amount of the ESP' payments is further evidence that this consideration was not the sum of each individual teacher’s loss of actual wages. The ESP payments are neither tailored, on a case-by-case basis, to the recipient’s employment record nor to the recipient’s current wage rate. Moreover, the ESP payments are not equivalent to each teacher’s loss of earning capacity because the age of each teacher varies considerably. In sum, there is no correlation between the amount of the ESP payments and the teachers’ individual employment circumstances that would lend support to the majority’s theory that the ESP payments constitute discretely earned wages for purposes of income tax withholding and the FICA. As Gerbec holds, remuneration for actual wage loss, past and future, is subject to FICA taxation. However, payment in exchange for the relinquishment of other vested and bona fide claims such as tort and statutory rights are not subject to FICA taxation.

The majority is persuaded that the ESP payments were not made in exchange for the plaintiffs forfeiting their tenure rights by the fact that eligibility to participate in the ESP was conditioned upon a teacher working fór a specific duration. This, the majority concludes, is an important, if not dispositive, factor in determining whether payments “arise” from an employment relationship for purposes of FICA taxation. I agree with the proposition that where an employment contract and past service to the employer constitute the consideration for the payment, such payment is indeed inextricably tied to “services” rendered the employer. However, the present circumstances do not yield a similar conclusion. The majority’s rationale that the ESP payments were made in consideration of the plaintiffs’ past years of service is belied by the fact that similarly situated employees who did not relinquish their tenure rights received nothing. The majority further ignores the critical fact that the rights relinquished by plaintiffs stemmed from the entirely separate grant of authority created by state statute and, thus, required specific relinquishment of statutorily protected tenure rights. For these reasons, I would hold that it was this relinquishment, not the years of service, for which the school districts paid.

In North Dakota, the Eighth Circuit examined a materially indistinguishable set of facts, 255 F.3d at 599. Faced with the presentation of a correspondingly similar issue, the North Dakota court differentiated the tenured faculty from the non-tenured administrators, stating that “the administrators who were not on the academic staff were [not] anything other than at-will employees entitled only to extended notice before termination.” Id. at 608. Accordingly, the non-tenured employees’ severance payments were subject to FICA taxes, because the payments corresponded to the number of years worked rather than the forfeiture of a due process right. Id. While the tenure-qualification process at issue was more rigorous, id. at 606, Michigan law similarly recognizes tenure as a property right and provides procedural safeguards, qualifications, and protections for the tenure rights of public school teachers. See Tomiak v. Hamtramck Sch. Dist., 426 Mich. 678, 397 N.W.2d 770, 780 (Mich.1986); see also Klender, 328 F.Supp.2d at 765-67 (discussing laws that govern the process of tenure in Michigan).

Although North Dakota is not controlling authority in this Circuit, the decision is entitled to considerable deference. See Aeroquip-Vickers, Inc. v. Comm’r, 347 F.3d 173, 181 (6th Cir.2003) (“ ‘Uniformity among the circuits is especially important in tax cases to ensure equal and certain administration of the tax system. We would therefore hesitate to reject the view of another circuit.’ ” (quoting Nickell, 831 F.2d at 1270)).

In addition to North Dakota, the District Court for the Western District of Pennsylvania recently held that early retirement incentive payments made to tenured faculty and administrators at the University of Pittsburgh were not subject to FICA taxes. Univ. of Pittsburgh v. United States, No. 04-1616, 2005 WL 3619245 (W.D.Pa. Oct.18, 2005) (magistrate decision), adopted, November 21, 2005. Analyzing virtually indistinguishable circumstances, the court found the rationale of North Dakota persuasive, holding that: (1) no “service” was rendered in exchange for the payments, thus rendering the payments an exchange for the “relinquishment of protected property rights,” id. at *11-12; and (2) non-tenured faculty members offered the same payments were subject to FICA taxation, as they possessed only an “expectation of continuing employment,” id. at *12.

Finally, in this appeal, the district court opinion in Klender offers a well-reasoned analysis in support of its conclusion that the contested payments are not subject to FICA taxation. Klender, 328 F.Supp.2d at 760-67.

V.

The majority relies on Revenue Rulings to buttress its conclusion that the ESP payments are subject to FICA taxation. However, the Revenue Rulings at issue, which are persuasive authority at best, do not preclude the conclusion that the subject ESP payments are not taxable pursuant to FICA. See Aeroquip-Vickers, Inc., 347 F.3d at 180 (holding that revenue ral-ings are not entitled to Chevron deference (i.e. when a non-arbitrary agency regulation controls)) but are reviewed under the Skidmore standard (i.e. regulations have the power to persuade, as they are the official IRS interpretation, but do not control); North Dakota, 255 F.3d at 604 n. 6 (“[Rjevenue rulings do not have the force of law, [but] they are entitled to respectful consideration ....”) (internal quotation omitted).

The parties cite four Revenue Rulings— 58-301, 74-252, 75-44, and 2004-110 — as relevant to this case. The courts in North Dakota and Pittsburgh relied on three of these rulings — 58-301, 74-252, and 75-44. Although Ruling 2004-110 generally supports the government’s position, plaintiffs contend that it was promulgated in anticipation of litigation.

In Revenue Ruling 58-301, the IRS determined that FICA taxes were not owed on a lump-sum payment received by an employee as consideration for the early termination of his five-year employment contract. 1958-1 C.B. 23, 1958 WL 10630. The IRS further determined that the employee received the lump-sum payment in exchange for the relinquishment of his contractual rights (i.e., to be employed for the full five years) and therefore not subject to FICA taxation. Id.

In contrast, however, the IRS concluded in Revenue Ruling 74-252, that payments made to an employee to unilaterally terminate his three-year employment contract were taxable as FICA wages because the contract gave the employer the right to terminate the contract at any time, so long as the employer paid the employee an additional six-month salary, which it did. 1974-1 C.B. 287, 1974 WL 34867. The Ruling distinguished 58-301 by noting that, in 74-252, the employee received payment pursuant to an already-present employment contract. Id.

In the instant case, I would hold that the ESP payments are most like the payments in Ruling 58-301, as they did not arise from the employment contract. Indeed, the ESP payments are ultimately distinguishable from either Ruling, as they were made in exchange for an entirely separate statutory right.

Finally, in the case that the majority finds most persuasive, Revenue Ruling 75-44 held that a lump-sum payment given to a railroad employee to buy-out his seniority rights earned pursuant to a general employment contract was taxable under the Railroad Retirement Tax Act (FICA’s counterpart for railroad employees). 1975 C.B. 15,1975 WL 34658. After noting that the employee was only an at-will employee